Published in Volusia County Bar Association Communicator
By Greg Snell
A liability insurance policy is a contract between an insurer and an insured to defend and indemnify the insured for covered risks. When an insurer fails to fulfill those duties they are liable for breach of contract. Claims against insurers for breach of contract are relatively uncommon, but in a given circumstance may be the best, or only, option to obtain recompense for a consequential loss.
A leading Florida state court case on this subject is Carrousel Concessions, Inc. v. Fla. Ins. Guar., Ass�n, 483 So.2d 513 (Fla. 3rd DCA 1986), in which it was held that because the defense provided the insured was inadequate, forcing them to procure substitute counsel, there was a contract breach and the insurer was liable for the defense costs of the insured. The Carrousel opinion cited Thomas v. Western World Ins. Co., 343 So.2d 1298 (Fla. 2nd DCA 1977), for authority that liability would have equally applied had there been no defense provided, and all foreseeable damages which reasonably flow from such a breach, are recoverable, not just defense costs. The Florida federal courts have adopted this law, most notably in the Middle District case of Travelers Indemnity Company of Illinois v. Royal Oak Enterprises, Inc., 344 F. Supp.2d. (M.D. Fla. 2004). Neither the Florida Supreme Court, nor the Fifth District Court of Appeal, has fully addressed this topic, although they have cited the above referenced cases.[1, 2]
It is often in the context of a failure to defend, or adequately defend, that an insurer breaches a contract, and the consequences can be serious. An insured may not be able to afford any defense, or much of one, with predictable results. But, if an insured is able to fund a defense, they are entitled to direct it as they see fit, including settlement, and the insurer cannot later complain. The insured has a duty to mitigate damages when directing the defense. Some abandoned insureds have assigned their breach of contract claims against their insurers to those who have sued them in exchange for assurance that damages won�t be sought from them directly. Insurers found in breach are liable for whatever consequences may result, notwithstanding the policy limits, so long as the damages were reasonably foreseeable at the time the contract was entered.
When in doubt a prudent insurer will file a declaratory judgment action, and obtain a ruling, before abandoning an insured. An insured could do so as well. The peril in doing otherwise is well illustrated by a matter handled by the author where a local business was sued in Kentucky by a competitor, ostensibly over intellectual property, but practically to stifle the formidable competition they posed. The insurer refused to defend. The client retained a large law firm in Kentucky. Defense costs quickly exceeded $250,000, and were expected to exceed $1,000,000. The client was confident they could win on the merits but settled due to the prohibitive legal expenses. They paid some cash, but, more significantly, agreed to a consent injunction not to compete in this lucrative line of business for 4 years.
Suit was filed in Volusia County for breach of contract and summary judgment was entered on the duty to defend. The case went to trial. The jury concluded it was reasonably foreseeable if the insurer didn�t defend that the client would be forced to settle as they did and awarded damages of $18,787,500, all but $287,500 of which was lost profits for the 4 year injunction period. The case settled on confidential terms while on appeal. Suffice to say a costly mistake by the insurer.
Although the focus of this article has been on liability insurance policies, the same holds true for any type of insurance policy. Particularly since damage recovery can exceed policy limits a claim for breach of contract may be the preferred option for seeking recompense when an insurer is in breach.
Greg Snell is an attorney with the firm Snell Legal who provides representation in a wide range of business litigation matters. He accepts referrals and is also available for consultation or to serve as co-counsel to assist with business damage or other business litigation issues. Mr. Snell can be contacted by telephone at 386.677.3232 or by e-mail at firstname.lastname@example.org.
1 See e.g. Jones v. Fla. Ins. Guar. Ass'n, 908 So.2d 435 (Fla. 2005); and Vanguard Insurance Company v. Townsend, 544 So.2d 1153 (Fla. 5th DCA 1989).
2 Two additional cases on this subject of recent vintage are: Employers Insurance Company of Wausau v. National Union Fire Insurance Company